Large-Scale Inequality

Through three parts — education, wealth and technology — Talent Economy examines the effects social and financial imbalance have on the quality and future of workplace talent.

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Can the U.S. Education System Fix Inequality?

By Lauren Dixon

T

he education system of the United States, from primary school through higher ed, must overcome a number of obstacles to smooth the widening inequality gap contributing to businesses’ ability to source diverse pools of talent.

“Education is about creating a level playing field,” said Andreas Schleicher, director for the directorate of education and skills, as well as special adviser on education policy to the secretary-general at the Organization for Economic Cooperation and Development. “Where you do have educational outcomes set by social background, you’ll see that translated to economic opportunity. I do think the link is robust and strong.”

Equal Opportunity?

Opportunity, however, remains unequal for many minority and low-income groups in the U.S. education system.

The U.S. Supreme Court effectively ended segregation in public schools in 1954 with its Brown v. Board of Education ruling, but the promises of full integration still haven’t taken hold 63 years later. “Not all students, not even those in the same school, experience equal opportunities to learn,” Schleicher said.

Illustrations by Theresa Stoodley

For starters, school resources aren’t always matched to student needs, as more wealthy school districts have more up-to-date facilities and better-quality teachers than low-income areas. “Low-achieving students and disadvantaged students stand to gain the most from highly qualified teachers, but they are often paired with the least-skilled teachers,” Schleicher wrote in his OECD report, “Equations and Inequalities: Making Mathematics Accessible to All.”

Equal opportunity in education is important because “your school today is going to be your economy tomorrow,” Schleicher said. “It’s not just an agenda of more economic participation, but also one of greater social cohesion, greater kind of strength in our societies. That’s something to be valued as well.”

Businesses Jump In

Adding to the struggle of defeating social inequality in schools is the challenge of ensuring that the way students are learning is relevant to the future needs of the economy.

It is to this end that some U.S.-based business leaders are investing in primary education in an effort to overhaul how students learn. Marc Benioff, CEO of software firm Salesforce.com Inc., has pledged $100 million to San Francisco’s school district to be paid over the course of 10 years. Under the system, school administrators apply for “innovation grants,” which Benioff distributes through his company’s nonprofit arm, according to The New York Times. These grants have gone toward hiring math teachers and developing a computer science curriculum that covers kindergarten through the 12th grade, with the promise of establishing a system more likely to produce students ready to take on jobs in technology. Other tech firms, including Facebook and Microsoft, have made similar investments to push school districts to change their curricula to better accommodate skills for future technology jobs.

This speaks to the important role business has in creating change in the education system to make it more equal and apt for the future needs of the economy, Schleicher said, adding that partnerships between schools and companies can help raise expectations in school, while making the learning more relevant.

Student Loan Struggles

When it comes to higher education, the challenge around inequality and the talent economy becomes more direct, as students increasingly take on debt to finance an education that doesn’t always lead to a well-paying career. Compounding the issue further is the fact that some experts aren’t certain that the link between access to higher education and wealth is as direct as once thought.

“Student debt and higher education are acting as a tollbooth to the labor market,” said Marshall Steinbaum, research director and fellow at Roosevelt Institute, a nonprofit partner to the Franklin D. Roosevelt Presidential Library and Museum based in New York, and a former research economist at the Washington Center for Equitable Growth. “I think that misdiagnosis and false prescription have now yielded their own economic problems, which is to say now the student debt crisis.”

Nevertheless, higher education is the primary way to build human capital. Through Steinbaum’s research, he found that rich people tend to have more education, and poor have less, but “it’s less clear that the reason why rich people are rich is because they have more human capital,” he said.

Current and former college students in the U.S. hold more than $1 trillion in student debt, while returns on those investments don’t always materialize as expected. By encouraging more people to gain a college education, the market has been flooded with highly qualified people who have been promised access to great jobs — something that Steinbaum argues may have discounted the value of the credential in the labor market.

Between 1980 and 1995, average tuition rose 234 percent for in-state, four-year public colleges in the United States. In the same period, median household income increased 82 percent, compared to a 74 percent increase to the Consumer Price Index, according to a report from the U.S. Government Accountability Office. The report says tuition increased because of larger college expenditures and “greater dependency on tuition as a revenue source,” as state contributions decreased and student grants didn’t keep pace. Tuition hikes this year have started to slow.

Student loans in countries like Australia, for instance, which created its income-based repayment system in 1989, mean graduates only pay their loans back after getting a job that pays at a certain threshold, according to Inside Higher Ed. The U.K. has a similar system, in which payments come straight out of worker salaries; after 30 years, loans are forgiven. Both of these countries have higher college completion rates than the U.S. In 2012, 44 percent of 25 to 34 year-olds in the U.S. gained a university-level education, ranking No. 12 in the world, according to OECD data.

From School to Society

Although access to college education has generally increased over time, there are still obstacles for some groups once they enter the labor market, particularly women and minorities.

Women are graduating college at higher rates than men in the U.S. In 1967, among those 25 years old and older, 13 percent of men and 8 percent of women earned a bachelor’s degree or higher. In 2015, 33 percent of women and 32 percent of men gained their degrees, according to the U.S. Census Bureau.

Still, women working full time earned 83 percent of men’s median hourly earnings in 2015, and they face different hindrances to climbing the corporate ladder, according to Pew Research Center, including taking time away from work for child care, choosing industries that pay less and institutional sexism that puts them on a more difficult path to success.

Meanwhile, African-Americans have faced a variety of significant barriers to economic and social equality. “Due to the lack of wealth, the lack of high levels of valuable property ownership among African-Americans for historical reasons, the only avenue for social mobility for black Americans that’s been significant — apart from the entertainment sector of the world — has been an avenue that’s drawn by higher-education opportunities,” said William Darity Jr., professor of public policy, economics and African and African-American Studies, and the director of the Samuel DuBois Cook Center on Social Equity at Duke University.

At every level of education, African-Americans face twice the unemployment rate of white Americans. And African-Americans with college degrees have about two-thirds the net worth of white Americans that never finished high school.

Those opportunities mean more African-Americans gain an education and improve their potential for employment. Between 1976 and 2014, the percentage of college students who were African-American grew from 10 percent to 14 percent, while white enrollment dropped from 84 percent to 58 percent, according to the National Center for Education Statistics.

Once students earn a higher-education degree, however, a good job isn’t guaranteed. Other hurdles are still in place, preserving disparities in wealth and social mobility.

While greater access to education has proven to be a source of upward mobility for some African-Americans, it hasn’t played much of a role in closing the wider unemployment gap, Darity said. At every level of education, African-Americans face twice the unemployment rate of white Americans. What’s more, African-Americans with college degrees have about two-thirds the net worth of white Americans that never finished high school, according to a 2011 report by economists at Duke University and the University of North Carolina.

Moreover, when moving from college to the private sector, many graduates face challenges in gaining jobs at top-tier firms, despite having the qualifications necessary for the roles.

Talent pipelines to firms often come in the form of exclusive social networks, often based on where people went to college, Darity said. “That’s a way in which you, to some degree, lock in a certain level of inequality of opportunity.” If there’s a wide swath of colleges or universities that rarely have diverse groups hired in roles that generate the highest incomes, then there’s an exclusion taking place that would reinforce the inequality we see, Darity said.

Trends like these are partly to blame for high unemployment rates and lack of wealth among African-American populations.

“We have to be careful about which way we think about the causation, so it could be the education is actually a manifestation of social inequality, rather than something that is producing social inequality,” Darity said.

Mind the Gap: Disparity of CEO to Average Worker Pay a Concerning Trend

The gulf between CEO compensation and the average worker has created a morale drag on the talent economy that shows no sign of letting up.

By Michelle V. Rafter

I

n the 1950s and 1960s, chief executives at publicly traded companies routinely turned down raises because they feared the disparity between their salaries and the average worker’s pay would hurt morale.

How times have changed. Ever since Gordon Gecko uttered the now-famous line “Greed … is good” in the 1987 movie “Wall Street,” the watchword for CEO pay has been more — a whole lot more.

The anecdote about midcentury executive pay comes from Steven Clifford, an ex-broadcasting company CEO who’s served on more than a dozen corporate boards. In his book, “The CEO Pay Machine,” published earlier this year, Clifford excoriates the system he was once part of.

In the past 30 years, the gap in pay between CEOs and the average worker has widened to a chasm. In 2016, CEOs at the largest U.S. companies averaged $15.6 million in total compensation, 271 times the annual pay of the average worker, according to a July report from the Economic Policy Institute. Though it dipped slightly from the previous two years, the pay ratio has increased more than fivefold from what it was in 1989, according to EPI.

Economists point to skyrocketing executive compensation as a major contributor to the income inequality that exists in America. The disparity is a leading issue of our time, one that arguably helped usher Donald Trump into the White House as a champion of working-class men and women. Despite his populist pledges, CEO pay remains in the stratosphere, and while corporate profits are booming and the country verges on full employment, the gap remains.

Roots of High CEO Pay

Today’s CEOs earn more because they have a stronger say in how they’re paid, not because they’re more productive, have special talents or are better educated than executives in the past, according to the EPI report. As a result, the fruits of economic growth are going disproportionately to them, not ordinary workers.

The current CEO pay gap also stems from changes to executive compensation that date back to the 1980s. In response to criticism that executive pay was already too high, boards of publicly traded companies began awarding CEOs stock options, which tied their performance to a company’s stock. But advocates of greater corporate social responsibility blame boards for failing to ding top executives for not meeting stated goals.

In addition, boards’ compensation committees use unrealistic comparisons for setting CEO pay, for example, benchmarking companies against businesses that are much bigger or more successful, said Rosanna Landis Weaver, program manager on executive compensation at As You Sow, an Oakland, California, nonprofit that promotes corporate social responsibility through shareholder advocacy. Many boards aren’t as independent as they should be and, as a result, are more inclined to give CEOs overly generous pay packages, Landis Weaver said.

Despite the recent actions of some activists, shareholder groups in general don’t seem to be exerting pressure to keep CEO pay in check, said Emmanuel Saez, an economics professor at the University of California, Berkeley, and director of the school’s Center for Equitable Growth. “It looks as if shareholders are happy to let CEO pay grow in exchange of CEOs keeping labor costs, and hence pay of ordinary workers, low,” Saez said.

Other Factors Weigh on Pay

While CEO pay may be a significant contributor to income inequality, it’s not the only one. In a 2016 report on the evolution of top U.S. incomes, Saez also attributes the gap to the decline of progressive tax policies and unions, fewer companies providing employees with health and retirement benefits, and changing social norms that have affected attitudes toward pay inequality.

The rise of so-called “super companies” has played a role as well. Companies such as Google parent Alphabet Inc. and Amazon.com Inc. have used rapid technological change to boost sales relative to labor costs and pick up market share, which has suppressed wages, according to a report from the National Bureau of Economic Research.

The perception that income inequality is bad is not held by all. Conservative economists dispute the size of the CEO pay gap and its relative effect on the economy. Kevin Hassett, an economist with the conservative American Enterprise Institute, former professor at New York University and Trump’s pick to chair the White House Council of Economic Advisers, has argued that income inequality isn’t as wide or important as his liberal counterparts make it out to be, as Quartz reported in March. Hassett maintains that data used to measure it frequently don’t include the value of medical benefits, which would add to low-income workers’ total compensation. He also argues that liberal-leaning economic research ignores income from government programs such as unemployment insurance and Medicaid, which would further minimize the gap.

Hassett and other conservatives see consumption, which has remained relatively stable over the years across all income groups, as a better indicator of any gap than compensation. “Even if there have been gains at the top, it has not resulted in adverse consumption effects for those further down the income ladder,” Michael Tanner, a senior fellow with the Cato Institute, wrote in a 2016 report on economic inequality.

The CEO Pay Ratio Disclosure Rule

As could be expected given that point of view, aside from pushing to return middle-class manufacturing jobs to the U.S., the Trump administration is generally not expected to take broad policy action to address income inequality. A pending Securities and Exchange Commission rule on CEO pay ratio disclosure held over from the Barack Obama era is close to being implemented; it’s not clear whether the current administration will act to delay it. The policy, part of the Dodd-Frank legislation passed in the wake of the financial crisis to bring more accountability to Wall Street, requires most publicly traded companies to publish the difference between their CEO’s compensation and their workforce’s median pay in their annual proxy statements. The rule is due to take effect in January 2018.

Still, some companies aren’t waiting for government action to right the pay ratio within their own workforce. A notable example is Gravity Payments CEO Dan Price, who became a brief media sensation in 2015 after pledging to boost the annual minimum wage at his Seattle-based financial services startup to $70,000, funding the increase by cutting his own $1.1 million salary to the same amount. By the end of 2017, all of the company’s 133 employees will make the $70,000 minimum salary or more. By earning “a more workable income,” employees are more engaged and that has led to better business outcomes, Price told the Tacoma News Tribune earlier this year.

Other small businesses are following suit. In January 2016, PharmaLogics Recruiting CEO Megan Driscoll raised base salary for the firm’s recruiters by $12,500 to $50,000. A higher base meant adjusting pay for other jobs too, resulting in a net payroll increase of $460,000. A year later, employee turnover at the Quincy, Massachusetts, company has fallen, revenue was on pace to more than double to $15 million and profits were holding steady, according to Forbes. A New York-based steel company doled out 10 percent annual pay and benefits increases for the past three years, according to The Wall Street Journal.

The combination of competition for employees caused by a low jobless rate and higher minimum wages in some cities and states is trickling down to the lowest-paid workers. In the second quarter of 2017, weekly pay for restaurant workers and other of the lowest-income U.S. employees rose faster than for any other group for the first time since 2010, according to the Labor Department. Still, it’s not enough to make up for a 12.5 percent pay increase workers in the lowest 10th percentile have seen overall since 2009 compared to a 20 percent increase for workers in the 90th percentile.

The small win for low-wage workers and higher salaries that small business owners are offering to hang onto valued employees still pales in comparison to the king’s ransom that public company CEOs collect. Saez, the UC Berkeley economist, doesn’t see that changing. In the coming year, he said, “CEO pay will stay at the current extremely high levels.”

Technology’s Role in Global Inequality

The technology sector’s influence and power has both played a part in creating wealth inequality and is one solution to fixing it.

by Andie Burjek

There has undeniably been an impressive technology boom in recent years. The rate at which technological advancements are made is faster than ever, and the tech industry itself is gaining increasing influence and power. But the economic benefits of that boom have not necessarily resonated with many segments of the population.

Consider Facebook Inc., which despite CEO Mark Zuckerberg’s plea to fight wealth inequality and support universal basic income in his 2017 Harvard University commencement speech, still has its own inequality problems, with both software engineers making $160,000 and, as The Guardian reported in July, cafeteria employees living in a garage. This disparity plagues Silicon Valley, which since the tech boom has seen rents and home prices skyrocket to unaffordable levels.

There are a few ways to look at technology and its impact on the economy. There’s the tech industry, in which many jobs exist and in which employees need very specialized skills. And then there’s the technology itself, from automation to artificial intelligence, which may eliminate the need to hire people for certain jobs. Either way, there is a skillset or a job that becomes irrelevant due to technological advances.

The impact of technology on inequality is defined in this context as the gap between top and bottom earners in terms of both educational opportunities and pay. Also, how can technologies can help mend some of the world’s inequality problems?

Success breeds success. The benefits of new technologies tend to become more and more unequally shared across the industry, according to Zia Qureshi, nonresident senior fellow in the Global Economy and Development program at the Brookings Institution. Qureshi’s research covers global economic issues and emerging market economies.

“Those who have prerequisite skills that are in demand, they are doing better,” he said. “Those who have lost jobs are faring worse in terms of the income they are making. They haven’t had the time or opportunities to retrain, get back into the market and do the new kind of jobs.”

To be sure, education and training can offset some of this, Qureshi said, but there’s been a lag in that area. “Some people look at the increase in inequality as a race between education and technology,” he said. “If you look at it in that way, education has been losing the race with technology.”

There has been some innovation in both public and private companies partnering with retraining organizations, he added, but that kind of policy response has to be significantly stepped up. There’s a role for policy moving forward in terms of strengthening training systems like retraining, lifelong learning and apprenticeships.

Many organizations are already tackling this very challenge of creating more efficient education models. For example, professional associations that represent certain fields have technology-enabled training programs that skill workers.

“[Associations are] filled with social impact experts,” said J.P. Guilbault, president of Community Brands, a technology solutions company for associations and nonprofit organizations. “They play a great part in retraining and providing the next wave of education in the workforce, and they will continue to emerge as a leading provider of education by doing it through technology.” This is especially important as people increasingly lose strength-based jobs and seek new opportunities, he said.

The American Academy of Pediatrics uses distance-based learning enabled by technology and delivered through the internet and mobile devices for doctors working in third-world countries to help reduce mortality rates within the first three minutes of life, Guilbault said. Another association, the Healthcare Information and Management Systems Society, educates caregivers and patient intake providers on the Affordable Care Act’s impact.

“What was covered, what bills would be collected and who was responsible wasn’t any longer the CFO or accountant’s job but literally every caretaker in the hospital,” he said. Accessing and educating all these people required using technology effectively, for example by providing online professional development and certification.

A number of educational technology companies, including CorpU, Udemy, Coursera, General Assembly and others, also aim to use technology to spread educational opportunities.

Darren Shimkus, general manager at education technology firm Udemy, sees a relatively small number of people with in-demand skills like coding earn disproportionate gains in the current economy. “It’s our belief that technology can help widen the pool of people who can do those things and allow to get access to that next economic rung in their development,” he said.

For example, Udemy is working with a Canadian railway company predicting that a large number of jobs will likely be automated in upcoming years. Employees can use the Udemy platform to learn new skills, like coding and data science, that will be relevant in future years.

The most progressive companies are putting learning in the hands of the learner, allowing them to train in areas not necessarily related to their current job.

The most progressive companies are putting learning content in the hands of the learner, allowing them to train in areas not necessarily related to their current job, Shimkus added. Individual employees are in the best position to realize what skills they need.

Technology plays a role in the changing economy, but it is not inherently an evil force. “We owe a lot of our daily comforts to technology,” Qureshi said. “But it does cause disruption that requires adjustment. Those adjustments are possible, only they call for people to make that adjustment and for policies to respond accordingly to support and facilitate those adjustments.”

The project Qureshi is currently working on, a collaboration between the Brookings Institution and the Chumir Foundation for Ethics in Leadership, explores how policy can improve inequality and revive productivity. Despite the seeming boom in technology, productivity has slowed down in most advanced economies and major emerging economies, he said. And as production has slowed, inequality has increased.

Policy can affect competition. For example, in the United States most industries are increasingly concentrated, which may weaken competition, reduce incentives to innovate and prevent the benefits of innovation from being widely shared.

This may mean the need for tech policies that would facilitate broader diffusion of innovation, Qureshi said. For instance, patents exist for good reason; they support innovation. But what is needed is the balance of rewarding innovation and ensuring a wider economic impact of innovation, Qureshi said.

“Right now it’s a relatively small number of firms that are the main beneficiaries of technological breakthroughs,” he said. “They find ways of maintaining their dominance using those technologies. In this area, you don’t want to kill the goose that lays the golden egg, but there is a need for the right balance.”

Another important policy issue is net neutrality — the principle that the internet is open to everyone, meaning that internet service providers can’t block content or intentionally slow down load times for particular websites. The internet has to be free and open to everyone in the world. “It’s the only viable way to have those who are either disadvantaged through geography or even a disability to still have the opportunity to learn and grow,” Community Brands’ Guilbault said.

The openness of the internet in the United States is something that’s currently under pressure, considering that the current Federal Communications Commission looks at internet as more of a utility than a right. “This is where advocacy and organizations like associations and nonprofits get involved,” Guilbault said. They’re all about social impact and should be advocating for net neutrality, he added.

Throughout the changes in the skill landscape and in the overall economy, people have had concerns about their futures.

But futurists have been warning about how technology will destroy jobs for as long as machines have been around, said Andrew Chamberlain, chief economist at Glassdoor, in the job report “Looking Ahead: 5 Job Trends to Watch in 2017.”

“Research shows that large-scale job losses due to automation are unlikely,” he wrote. “But what’s almost certain is that everyone’s job will change in some way.”